Gas Taxes and Air Pollution: Issues with Uniform Taxation

NBER Digest reporter Claire Brunel covers a new paper by Christopher Knittel and Ryan Sandler on gas taxes and air pollution that makes an interesting point (see the end of the post in bold) about uniform gas taxes.

While some have questioned the benefits of mass transit systems, which are used by only a small fraction of commuters, research by Michael Anderson suggests  that transit riders likely would otherwise commute along already heavily
congested roadways — and that congestion along those roadways would increase if  mass transit were scaled back. In Subways, Strikes, and Slowdowns: The Impacts
of Public Transit on Traffic (NBER Working Paper No. 18849), he studies  traffic-congestion data from before, during, and after an October-November 2003  transit-worker strike in Los Angeles. He estimates that average highway  congestion delays increased 47 percent when public transit service was not
Driving a car produces an externality — pollution — that imposes various  economic costs, but drivers do not directly pay for that externality. The efficient economic remedy would tax individual drivers based on their vehicles’ emissions, but that is currently impractical. Taxing gasoline purchases, which
are related to emissions, is an indirect alternative, but the gasoline tax does  not take into account the variation across vehicles in per-gallon emissions. In  The Welfare Impact of Indirect Pigouvian Taxation: Evidence from Transportation
(NBER Working Paper No. 18849), Christopher Knittel and Ryan Sandler examine how differences in consumers’ price sensitivity of demand for gasoline, and  variation in per-gallon emissions across vehicles, affect the efficiency of the
gasoline tax as a policy instrument for reducing pollution.
Using vehicle data from California for the period 1998 to 2008, they find that  the variation in vehicle emissions is correlated with how  vehicle-specific-miles-driven respond to a change in gasoline prices. The  drivers of dirtier vehicles respond substantially more to changes in fuel prices
than the drivers of clean vehicles. This means that the local pollution-lowering  benefits from an increase in the gasoline tax are larger than estimates based on  equal-demand responses across all drivers.  In fact, the authors estimate that the health benefits of a gasoline tax would increase by 90 percent once the variation in responsiveness of vehicle emissions
is taken into account. This result is not driven by a vintage effect, whereby  older vehicles are more responsive to changes in gasoline prices and at the same  time have higher emissions.
The authors find that a uniform tax on emissions — currently impractical but often discussed — would perform poorly in eliminating the inefficiencies 
associated with vehicle emissions. Over 75 percent of those inefficiencies would  remain with such a tax. The dirtiest vehicles, which are most responsive to an  emissions tax, would not be taxed enough while some clean vehicles would be over-taxed. One potential strategy for reducing these inefficiencies would be to  condition taxes based on vehicle type, and particularly on the age of the vehicle. Another route would be to scrap the dirtiest 10 percent of vehicles, or  to retire the most polluting vehicles through cash-for-clunkers or allowing gasoline taxes to be county-specific.


About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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3 Responses to Gas Taxes and Air Pollution: Issues with Uniform Taxation

  1. Pingback: Links for 07-11-2013 | Symposium Magazine

  2. mike says:

    Article 1 Section 8 of the U. S. Constitution states: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” That would appear to rule out any rate variation in a federal gasoline tax and would require any national system with varied rates to be the accident from individual state actions.

  3. Nathanael says:

    I am not clear on what “a uniform tax on emissions” is supposed to mean. If there is a straight-up per-ton-of-CO2 tax on carbon emissions, then yes, the most polluting cars will get taxed exactly the correct amount, and clean vehicles will be taxed exactly the correct amount. Perhaps the authors mean something else by “a uniform tax on emissions”.

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